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2021 2020 Sales $113,000 $80,000 Cost of goods sold 62,000 48,000 Gross profit 51,000 32,000 Operating expenses 21,000 8,000 Income from operations 30,000 24,000
2021 2020 Sales $113,000 $80,000 Cost of goods sold 62,000 48,000 Gross profit 51,000 32,000 Operating expenses 21,000 8,000 Income from operations 30,000 24,000 Income tax expense 9,000 7,200 Net income $21,000 $16,800 Gross profit margin 45.1% 40.0% The board of directors is about to meet and determine if Nazir is to be awarded his bonus. As one of the board members, you are surprised to receive an anonymous letter supposedly from a member of the accounting department that indicates that the CEO asked the staff member to do the following during 2021: 1. Record purchase returns of $7,000 as an increase in sales revenue. 2. Record freight of $5,000 paid on purchases of merchandise as an operating expense. 3. Include the $6,000 refund liability as sales revenue because the refunds might not take place. (a) Assuming that the staff member is right, correct the above adjustments and recalculate the gross profit margin. Is the CEO eligible for his bonus? (b) Did the adjustments requested by the CEO affect the profit margin? (c) Based on the above, was any harm done to any users of the financial statements because of the adjustments made? Explain.
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